UPDATE 2-Sri Lanka budget aims to cut 2013 deficit to 5.8 pct

Thu Nov 8, 2012 6:39pm IST

* Aims 7.5 percent economic growth next year

* Budget focuses on discouraging imports, boosting exports

* Sri Lanka expects new IMF loan in January

* New listing companies offered tax breaks (Adds details)

By Shihar Aneez and Ranga Sirilal

COLOMBO, Nov 8 (Reuters) - Sri Lanka aims to reduce its fiscal deficit to 5.8 percent of GDP in 2013, while attaining 7.5 percent economic growth next year, President Mahinda Rajapaksa said on Thursday, announcing the island nation's annual budget.

The government expects to meet this year's fiscal deficit target of 6.2 percent, the level agreed with the International Monetary Fund (IMF) under the terms of a $2.6 billion loan, which was fully disbursed in July.

The deficit was brought down to 6.9 percent in 2011, under the eyes of the IMF, from 8.0 percent in 2010.

While the deficit was being reduced, Rajapaksa forecast the economy would gather momentum after a slowdown this year as a result of tight monetary and fiscal policies adopted to curb the country's fiscal and external deficits.

"We expect to maintain growth of 7.5 percent in 2013 and to reach 8 percent thereafter. We will be able to achieve 6.8 percent growth this year," Rajapaksa told parliament while presenting the 2013 budget in his capacity as the finance minister.

Sri Lanka aims to accelerate growth of its $59 billion economy by pumping money into post-war infrastructure projects. There are some $21 billion worth of construction and rebuilding projects in ports, roads, railways and other infrastructure lined up through 2015.

Both the central bank and finance ministry have previously said the budget proposals will support an economic growth target of more than 7 percent and single-digit inflation.

Sri Lanka expects to negotiate a fresh loan from the IMF in January.

Rajapaksa said the government aimed to reduce Sri Lanka's debt to GDP ratio to 75 percent in 2012 from an estimated 78.5 percent this year.

TWIN DEFICIT TARGETED

The budget focuses on cutting imports and encouraging exports and foreign remittances in order to curb twin deficits of the trade and current account.

Last year, Sri Lanka ran up a record trade deficit of $9.7 billion, and in the first nine months of this year the deficit stood at $6.78 billion, showing virtually no improvement.

The central bank and finance ministry implemented tough policy measures, including a flexible exchange rate early this year to avoid a balance-of-payments crisis.

"Flexibilities in the exchange market will enable the required improvements in exports and the reduction of imports to narrow the trade deficit," Rajapaksa said.

"The government also projects an overall surplus in the balance of payments, which will strengthen our international reserves."

Rajapaksa increased taxes on the import of certain foods, including red onions and maize, with the aim of becoming self sufficient by 2015. He also raised an import tax on milk powder to save $350 million spent on dairy products yearly.

The president also proposed a two-year depreciation allowance for export manufacturers, including the apparel industry, to allow for modernisation.

Rajapaksa expected inflation to slow in 2013.

"By maintaining the money supply at 14 percent and favorable food supply, we expect inflation to drop to 7 percent," he said.

Inflation in October was running at 8.9 percent from a year earlier.

The president also offered a three-year half tax holiday for new companies that will be listed on the Colombo Stock Exchange before December 2013 subject to certain conditions. (Reporting by Shihar Aneez and Ranga Srilal; Editing by Simon Cameron-Moore and Ron Popeski)

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